Business tax and investment incentives
Corporation tax
Corporation tax rates and bands are as follows:
| Financial Year to | 31 March 2009 | 31 March 2008 |
|---|---|---|
| Taxable profits | ||
| First £300,000 | 21% | 20% |
| Next £1,200,000 | 29.75% | 32.5% |
| Over £1,500,000 | 28% | 30% |
| The small companies' rate of corporation tax will increase from 21% to 22% in 2009/10 |
Capital allowances
The following changes will take effect from 1 April 2008 for companies, or from 6 April 2008 for businesses subject to income tax unless stated otherwise.
Plant and machinery allowances
The current system of first-year allowances for small and medium sized businesses will be abolished. In addition, the rate of writing down allowances (WDAs) for plant and machinery in the general pool, including qualifying expenditure in excess of the Annual Investment Allowance (see below), shall be reduced from 25% to 20% per annum.
Where expenditure is incurred on certain fittings integral to a building, this shall be recognised in a 'special rate pool', which will give a WDA of 10% per annum on a reducing balance basis. 'Integral Fittings' include (but are not limited to) electrical and lighting systems, cold water and drainage systems, and air conditioning and heating systems.
The 100% first-year allowance for expenditure on low emission cars has been extended to 31 March 2013, although the threshold has been reduced to cars with CO2 emissions below 110g/km.
Annual Investment Allowance
An Annual Investment Allowance (AIA) is introduced for expenditure incurred by individuals carrying on a trade or business, partnerships and companies to replace the system of first-year allowances. The AIA is also available to individuals who acquire plant and machinery for use in their employment.
The AIA will give full relief for qualifying expenditure on plant and machinery up to a maximum of £50,000 in a twelve-month period. Where a period is more or less than 12 months, the level of allowance is proportionately increased or decreased. The AIA may be claimed against expenditure that would otherwise form part of the general pool or the special pool; however, it may not be claimed against expenditure on cars.
Where expenditure in a period exceeds the maximum £50,000, any excess expenditure shall be dealt with under the normal capital allowances regime.
Companies in a group are entitled to one £50,000 AIA per annum, to be shared between group members. Similarly, where "related" businesses are under common control, only one £50,000 AIA is available to the related businesses combined. Two businesses are considered "related" if they operate from the same premises, or if more than 50% of the turnover of each company is from similar business activities. Where a single AIA is split between two or more businesses, the AIA may be allocated in whatever manner the businesses see fit.
Environmentally beneficial plant and machinery
The existing 100% enhanced capital allowance (ECA) is retained where expenditure is incurred on 'Environmentally Beneficial' plant and machinery, and the range of technologies to which the relief applies is extended.
Where a company makes a tax loss as a result of claiming the ECA, the company may now claim for the attributable loss to be surrendered for a 19% payable tax credit, subject to an upper limit of the higher of £250,000, or the amount of PAYE and National Insurance paid in the period of surrender. Any tax credit may be clawed back if the qualifying plant is then sold in the following four years.
Industrial Buildings Allowances
As announced in Budget 2007, Industrial Buildings Allowances and Agricultural Buildings Allowances will be gradually withdrawn. For the year commencing 1 April 2008 for companies or 6 April 2008 for individuals, the amount of WDA available is reduced to 3%, with further reductions to 2% and 1% in the following two years, leading to a complete abolition from 1 April 2011. No balancing charges or allowances can crystallise on disposals made after 21 March 2007.
Proposed changes
It is proposed that from 1 April 2009 for companies, and from 6 April 2009 for businesses subject to income tax, WDAs for expenditure on cars shall be based on the level of CO2 emissions. Cars with emissions between 110g/km and 160g/km shall attract 20% WDA and cars with emissions in excess of 160g/km attracting 10% WDA.
The present system of disallowance of a proportion of payments in respect of expensive leased cars is also to be reformed from the same date, with a disallowance of 15% of payments in respect of cars with emissions in excess of 160g/km.
Research and development (R&D) tax credits
The enhanced deduction available to small and medium enterprises (SMEs) in respect of qualifying R&D expenditure is to increase from 150% to 175%. For large companies the enhanced deduction is to increase from 125% to 130%. These changes will take effect from a date to be appointed once EC state aid approval has been received. As from the same date, the SME tax relief will no longer be available to those companies whose most recent accounts were not produced on a going concern basis. In addition, the SME relief is to be capped at €7.5 million per R&D project.
In certain circumstances, the relief available to small and medium sized entities (SMEs) can result in a payable tax credit.
The increases in the thresholds previously announced in the 2007 Budget for determining whether a company is an SME or Large have not yet been approved by the EC under the State Aid rules.
Associated companies
The tax bands are reduced where a company has one or more associated companies. As from 1 April 2008, a company will no longer be associated with companies controlled by the business partners of the person controlling that company. The exception to this is where at any time the shareholder or director of the company and the business partner have made arrangements to secure a tax advantage for the company.
Enterprise Investment Scheme (EIS)
From 6 April 2008, subject to EC state aid approval, the limit on which an investor can claim EIS income tax relief will be increased from £400,000 to £500,000.
Employment related securities (ERS)
Enterprise Management Incentives (EMIs)
EMIs are tax and NIC favoured share options that can be granted to employees of small higher risk trading companies to facilitate recruitment and retention of employees. They are available to independent companies whose gross assets do not exceed £30m and do not carry out certain excluded activities. Employees who exercise their options in qualifying circumstances do not suffer income tax unless the option price is less than market value of the shares at the date of grant.
The following changes apply:
- As from 6 April 2008 the maximum value of shares over which employees can be granted options (also taking into account Company share Option Plan options granted to them) has been increased from £100,000 to £120,000.
- For options granted after the date of Royal Assent to the Finance Bill, only companies with less than 250 full time employees will be able to use EMI options. In addition companies involved in shipbuilding, coal and steel production will no longer be able to use EMI options.
As a result of capital gain tax reforms EMI option holders who exercise their options and subsequently sell their shares after 5 April 2008 will be subject to capital gains at 18% on their capital gains without the benefit of taper relief.
Resident but not ordinarily resident employees
Employees who are resident but not ordinarily resident and who are awarded ERS (including shares) or options over ERS will be taxed on the same footing as employees who are resident and ordinarily resident. This applies to ERS acquired or options over ERS granted, on or after 6 April 2008. This will bring profits on the award of ERS, or on exercise of options over ERS, for such individuals in relation to duties of employment carried on within the UK, fully within the ERS rules. Profits from ERS relating to non-UK duties will be taxed to the extent they are remitted to the UK. Non-domiciled individuals who are taxed on the remittance basis will only be subject to tax on profits arising from ERS relating to overseas duties if the profits are remitted to the UK.
Anti-avoidance
A number of measures will be introduced to tackle anti-avoidance.
Restrictions on trade loss relief for individuals
With effect from 12 March 2008, the sideways relief for trading losses against income and capital gains is restricted where contrived arrangements have been put in place to generate losses for an individual. In addition, individuals who spend less than 10 hours per week on commercial activities of that trade will also have their loss relief restricted.
In situations where the trading loss arises as a result of tax avoidance arrangements made on or after 12 March 2008, no relief for the loss will be available. In situations where the individual does not satisfy the 10 hours per week commercial involvement in the trade, the annual limit for loss relief will be restricted to £25,000. This is similar to the restriction on loss relief for non active or limited partners in partnerships.
However, these restrictions will not apply to qualifying film expenditure or to losses of a Lloyd's underwriting business.
Controlled Foreign Companies (CFCs)
The CFC rules bring within the charge to UK Corporation Tax the profits of low taxed foreign companies that are controlled by UK persons in circumstances where the five exemptions provided for within the CFC rules do not apply.
With effect from 12 March 2008, Finance Bill 2008 provisions will be introduced to block a number of artificial avoidance schemes that rely on the use of a partnership or trust's to escape a CFC charge either by misusing one of the exemptions or by arranging for profits to be earned in a way intended to fall outside the scope of the CFC rules.
Other
Other anti-avoidance measures will tackle:
- Plant or machinery lease schemes
- 'Disguised interest' schemes
- The transfer of intangible assets between related parties where one party is subject to insolvency proceedings
- Capital allowance buying and acceleration
- Deductible amounts in calculating profits on employment related securities
